Bakken Development Threats on the Horizon?

Bakken Oil Workers
Bakken Oil Workers

The Bakken is one of the most lucrative plays in the country, but there are some looming concerns for development. The good news is production growth is expected to continue.

New York City, NY-based financial information services company Fitch Ratings, Inc. published its “Bakken Shale Report” this week, which found the play had the highest oil cut among U.S. shales at 85%.

Oil production has been above 1-million b/d since April of 2014, according to the Department of Mineral Resources (DMR), and officials expect production to grow to 1.3-million b/d by 2015.

Read more: North Dakota Hits Record Oil & Gas Production

The primary challenge for upstream companies has been to balance gains from increasing production and drilling efficiencies with strained takeaway capacity,” according to Fitch Ratings.

The Fitch report found Bakken crude averaged ~$10 per barrel below West Texas Intermediate (WTI) in 2014, and rail is estimated to provide 60% of regional takeaway capacity and costs to ship affected spread levels.

This week, the price of Bakken crude fell to ~$73, which spurred conversation online about lower oil prices and how that could impact Bakken development. On Wednesday, North Dakota's Department of Mineral Resources Director Lynn Helms updated lawmakers on the status of oil & gas development in the state. Helms said two factors could negatively impact oil production - lower oil prices and new flaring regulations.

Beginning on June 1st, the North Dakota Industrial Commission (NDIC) began implementing its first in a series of policy changes aimed at reducing flaring in the Bakken.

The NDIC’s new “gas capture plan” (GCP) rule will require E&P companies to submit a document with their application for a permit to the commission specifying how they plan to capture gas produced from their drilling operations.

Read more: NDIC Implements New Bakken Flaring Rule

According to Fitch research, a large increase in Bakken production has disrupted traditional supply and demand balance in the region, and while pipeline capacity has struggled to keep up with volumes, Fitch expects supply and demand will begin to come more into balance in 2015 and 2016 as market participants strive to find the most economic placement for their barrels.

Bakken Natural Gas - Too Much of a Good Thing?

Bakken Oil Well
Bakken Oil Well

The oil & gas renaissance in the U.S. has nearly catapulted the country to the top spot for oil production in the world, and most experts believe the U.S. will hit this target by next year. But is it possible that the country and the Bakken has too much of a good thing? When it comes to natural gas that may be the case.

According to the BP 2014 statistical world energy review, the U.S. is currently the top natural gas producing country in the world at 328 Bcf/d. Over the past five years, natural gas production has grown over 20% in the U.S., thanks in large part to the shale revolution. But the price of natural gas has struggled to break $4/mmbtu, and oil companies in North Dakota's and Montana's Bakken Shale and the Eagle Ford Shale in South Texas have flared much of their produced natural gas in favor of capturing oil, which is a much higher valued commodity. Currently, the WTI price of crude oil is hovering around $95/bbl.

In North Dakota, where production from the Bakken Shale is highest, the state flares just under 30% of its produced natural gas. Recently, the first of several new rules has been enacted in the state to combat flaring. The North Dakota Industrial Commission (NDIC), the state's regulatory body for the oil and gas industry, hopes to capture 90% of Bakken natural gas by 2020; however, serious infrastructure improvements, including gas gathering systems and natural gas pipelines will need to be implemented in the Williston Basin for this goal to be achieved. The alternative could mean operators will need to shut-in wells to meet flaring guidelines - that's bad news for them, the state and mineral owners.

Read more: NDIC Implements New Bakken Flaring Rule - June 1, 2014

What this boils down to is the U.S. has an abundance of natural gas, which is a good thing. The bad thing is the country lacks the infrastructure to capture all of it.

With world usage of natural gas accounting for 24% of all primary energy consumed, there is decidedly a market for natural gas. But the only effective way to transport natural gas to foreign markets is to liquify it, which is costly. Ultimately, natural gas production is subject to the free market. As long as the price stays low, there's less economic benefit for operators to produce it, and companies to transport it and market it.